Sunday, July 25, 2010

East Asian Tigers and African Lions

William Easterly has recently argued that contemporary poverty in African nations may largely be accounted for by technological differences that date back for centuries, if not millennia:

1500 AD technology is a particularly powerful predictor of per capita income today. 78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even before the slave trade and colonialism. Moreover, these technological differences had already appeared by 1000 BC. The state of technology in 1000 BC has a strong correlation with technology 2500 years later, in 1500 AD...

A large role for history is still likely to sit uncomfortably with modern development practitioners, because you can’t change your history. But we have to face the world as it is, not as we would like it to be...

In a recent speech in Kampala, Gordon Brown offered a prognosis (coupled with a long list of policy recommendations) that was decidedly less gloomy about the future of Africa. Building on the observation that the continent is "full of more untapped potential and unrealised talent than any other," Brown continued as follows:

Twenty years ago nobody would have predicted that China and India would be the big drivers of growth and political superpowers they have become. And there is no reason to believe the countries of Africa cannot make similar leaps in the decades to come.... just as people have spoken of an American century and an Asian century, I believe we can now speak of an African century...

I believe the new African growth will come from five sources;

a faster pace of economic integration in Africa's internal market, and between your market and those of other continents, facilitated by investment in infrastructure

a broader based export-led growth, founded on new products and services

investment in the private sector from African and foreign sources in firms that create jobs and wealth

the up-skilling of the workforce, including through the acceleration of education provision, IT infrastructure and uptake and finally through

more effective governance to ensure that effective states can discharge their task of creating growth and reducing poverty

Each of these five priorities will be difficult to achieve. But we should remember the value of the prize. Because if we can agree a new model of post-crisis growth then Africa - already a 1.6 trillion economy - will continue to grow even faster than the rest of the world. This is not my assessment, but that of the world's leading companies and analysts. For example a report just published by the McKinsey Global Institute claims that Africa's consumer spending could reach 1.4 trillion dollars by 2020 - a 60% increase on 2008. In other words in ten years African consumer spending will be as big as the whole African economy is today.

It is those sorts of projections which mean people are now rightly talking not just of East Asian tigers, but of African lions.

Brown is careful to note that this rosy scenario is a "possibility rather than a probability" and that "it will happen through choice not chance." But, as Shanta Devarajan has recently observed, the choices necessary to make it happen are already being made:

In recent years, a broad swath of African countries has begun to show a remarkable dynamism. From Mozambique’s impressive growth rate (averaging 8% p.a. for more than a decade) to Kenya’s emergence as a major global supplier of cut flowers, from M-pesa’s mobile phone-based cash transfers to KickStart’s low-cost irrigation technology for small-holder farmers, and from Rwanda’s gorilla tourism to Lagos City’s Bus Rapid Transit system, Africa is seeing a dramatic transformation. This favorable trend is spurred by, among other things, stronger leadership, better governance, an improving business climate, innovation, market-based solutions, a more involved citizenry, and an increasing reliance on home-grown solutions. More and more, Africans are driving African development.

While the economic consequences of an African resurgence will be major, the social implications could be even more profound. I believe that the rise of the African lions will do more to shatter racial stereotypes in the United States and elsewhere than any government policy or electoral outcome. But that is a topic for another post.

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Update (7/25). I do not dispute the empirical claims made by Comin, Easterly and Gong, nor mean to suggest that that Brown's speech and Devarajan's post have any bearing on these claims. But I have serious doubts about the relevance of their findings for identifying future centers of economic dynamism or for shaping development policy. History can matter for long periods of time (for instance in occupational inheritance or the patrilineal descent of surnames) and then cease to constrain our choices in any significant way. Once reliable correlations can break down suddenly and completely; history is full of such twists and turns. As far as African prosperity is concerned, I believe that a discontinuity of this kind is inevitable if not imminent.

While Africa's increased economic momentum is widely recognized, less known are its sources and likely staying power... Africa's growth acceleration was widespread, with 27 of its 30 largest economies expanding more rapidly after 2000. All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24 percent of the continent's GDP growth from 2000 through 2008. Key to Africa's growth surge were improved political and macroeconomic stability and microeconomic reforms... total foreign capital flows into Africa rose from $15 billion in 2000 to a peak of $87 billion in 2007... Today the rate of return on foreign investment in Africa is higher than in any other developing region.

7 comments:

One of the economically important things going on in sub-Saharan Africa right now is Christian conversion among formerly animist populations. It is almost invisible to international economic organizations, because it isn't directly visible in economic statistics.

While the differences in metaphysical religious belief probably don't make a dime of difference, the church organization is a very dynamic force (if sometimes a virulent force, e.g. persecuting suspected witches and taking very socially conservative stances like the call for death to gays in Uganda - although the same legislature made the most dramatic improvement in the legal status of women in a short time period ever seen) in developing civil society and linking groups of people in Africa across intra-Africa divisions of pre-colonial tribe and ethnic affiliations. These churches make the revivals of the Great Awakening in the American South look like quiet little knitting circles.

For example, in Tanzania, this movement has given rise to the nation's first private college and more generally to a counterbalance to state power.

It is hard to overestimate how transformative this movement is culturally in turning disorganized local communities into highly organized communities.

Parallel charismatic Christianity movements in Latin America (which is predominantly Roman Catholic, a church which was historically the established church), involving a much smaller percentage of the population, have been at the center of the growing small business sector in those countries.

None of changes the fact that many countries have legacies of war, authoritarian regimes and double digit AIDs infection rates, or evolving violent conflicts between Muslim pastoralists and animist/Christian horticulturalists across the Sahel.

But, the bland description of what is going on by Gordon Brown flows from an economic model that misses the point to a great extent.

I agree with Professor Sethi here... but I had the misfortune of printing and going through the McKinsey Global Institute report (MGI) that you linked: and it is a disgrace! Not a single insight! Full of cliches! Think an Economics undergrad would flunk if he presented that report as a summer assignment...

I know it doesn't taint your last point Professor Sethi (on the update 7/25), but I needed to share that I expected MGI to be a lot better than the McKinsey teams that now go around the globe with a "CEO approach" (which they can't even define), advising Governments on what economic strategies (and industrial policies) they should adopt...

Has anyone gone through the report? How is it possible that these things don't affect their reputation? How can they be trusted to advise Govts on what is the new sector the country can thrive on? (btw, that's what the McKinsey consultants are doing now, around the Globe)

Dear Rajiv, thanks for the speech... lets hope the forecast is right...

But I still think much of the long-term outcome is going to be country-specific (I wonder about the value of making these arguments in terms of a regional grouping), and above all determined by each country's economic policy practices and effectiveness.

We have seen how short-lived episodes (5-10 years) of FDI inflows (led by privatizations and liberalization in non-tradable sectors, i.e. low hanging fruit) have nurtured unjustified cheer and confidence about a country's future growth prospects (as well as dangerous macroeconomic booms), only to discover at a later stage (when there's a bust, or FDI inflows gradually come to an end) that nothing much had changed in countries' patterns of specialization (sometime we actually observe deindustrialization).

I believe there's plenty of work out there backing-up the idea that a country's ability to systematically accumulate "new" exports and change its pattern of comparative advantage towards more "sophisticated" products is what we call "development", and that it depends above all on particular combinations of economic policy and Government support practices (industrial policy, explicit or through surrogates). Aside from all of the work coming from the IADB on export-discovery recently, or from the Kennedy School at Harvard (Rodrik/Hausmann, etc), here are three interesting discussions on this:

http://www.voxeu.org/index.php?q=node/5236

http://www.voxeu.org/index.php?q=node/5333

http://www.voxeu.org/index.php?q=node/5365

Now, often I agree with Easterly's lack of trust in development experts' ability to advise Govts on what they can do to accelerate growth. Brown's speech above, I think, highlights how dangerous bad advice can actually be, even if it only endorses MGI as one of "the World's leading companies and analysts", or makes a strange argument about what Africa's consumer spending is going to be in 2020 IF the trend continues...

I was born in Africa, Angola, and I wish I could see behind Angola's growth spurt episode a lot more than just a resource boom made possible by internal peace and stability. Mozambique and Kenya are totally different stories, I agree... and I guess there's plenty of sheer catch-up growth to be made now across the continent, as peace and political stability set in, but how much confidence can we really have in saying that what happened in the last 5 years will repeat itself for the next 10-15 years?

Joao, thanks for this comment - I want to post some more on Africa, and your remarks are very helpful to me in organizing my thoughts.

One thing the speech reminded me of is the "history versus expectations" dichotomy. I think that the process of development may involve a zone of uncertainty, a point at which coordinated optimism about growth prospects can lead to a radical shift in economic trajectory due (for instance) to investment spillovers. I wonder whether some countries in SSA are now in or approaching this zone. Would like to hear your thoughts on this.

Rajiv, "coordinated optimism", I like that idea! I think it is spot on, and at the very root of issue...

To the extent that such coordination is key (and I think it is), and leaving aside for the moment why it is (look at Hausmann’s paper presented at a Brookings Conference in May 2008 entitled “High Bandwidth Development Policy), what are the key characteristics that the "coordinator" has to have? Confidence? Credibility? Knowledge (which would rule out most bureaucracies in developing countries) or just the ability to try a lot, and drop mistakes? What does it mean for a Govt. to be that "coordinator"?

Last time I worked in Africa was some 8/9 years ago, in Cape Verde (for 3 months only) and a bit in Mozambique. But for the past 7 years I've divided my time between Southeast Asia and Central West Asia. I'm pretty sure Africa will show the same country differences in Govt's ability to trigger coordinated optimism ("risk-taking") as we can readily observe for example between Kazakhstan and Pakistan, Cambodia and Vietnam, etc...

As me and my colleagues dwell into "why things fail where we try to get public and private to seriously coordinate actions without generating dependence and accommodation, ingredients for pessimism" (with the tales of the Asian Tigers in the background, as a benchmark), I realize how important it was last year to read "The Miracle - The Epic Story of Asia's Quest for Wealth", written by Michael Schuman. The Economics in it is... ok... but most importantly I think, it gives us a very valuable glimpse into the “obsessive” (not only confident) and "optimist" character of the policy-makers behind the miracles of Japan, Taiwan, South Korea, etc... and how public-private coordination triggered much more systematic effort and risk-taking behavior than the accommodation and dependence we observe elsewhere when Govts get too close to businesses, etc...

(a colleague/friend of mine once referred me to a book by Jacobsson and Alam on “Liberalization and Industrial Development in the Third World” that compares India and South Korea industrial policies, see Box 2 on Page 53 of this document for an example: http://www.adb.org/Documents/RRPs/PAK/42163-PAK-RRP.pdf )

Now, neither I, or (I think) the author of the book subscribe to the idea of "cultural" determinants of development, but getting to know the human characters behind those amazing growth stories gives, I think, an idea of the key characteristics of successful bureaucracies. Especially when success is measured in the ability to “coordinate optimism” and trigger sustained structural transformation.

Again, this got too long… I (we) look forward for that new post of your… Best, Joao